This weekend marked the 50th anniversary of the Apollo mission in which Neil Armstrong became the first man to set foot on the moon. I’m not going commemorate this by trying to write a joke about the lunar mission as in space, no one can hear you pun.
Last week saw the oil price fall like a meteor as US-Iranian tensions begun to ease, though the situation remained fluid as the Iranian Revolutionary Guard seized a British-flagged tanker in the Strait of Hormuz. Asset class returns in sterling and local currency are below; market participants were particularly alerted last week by a significant slowdown in the Chinese economy.
Table 1: GBP total returns
Table 2: Local CCY total returns
Data emerged last week revealing China’s annual real GDP growth to have slowed to 6.2% – the slowest rate 1992 – which many commentators attributed to a combination of the US-China trade war and weakening global demand. The data release was accompanied by comments from China’s National Bureau of Statistics (NBS) which stated the growth rate was “high-quality and sustainable” and “relatively stable”. In an attempt to underplay the impact of the trade dispute, an NBS spokesman went on to say that “China’s economic growth is more and more reliant on domestic demand, especially on consumption”.
Chart 1: China’s real GDP growth rate has historically been manipulated for political purposes, so many economists often look at the nominal rate
Source: China’s National Bureau of Statistics
Despite attracting international attention, China’s real GDP growth is widely believed by analysts to be heavily smoothed by the NBS in order to meet the requirements of the Communist Party’s Five-Year plan. An example of this political pressure comes in the form of Beijing’s goal to double the size of its economy by 2020 compared with 2010. In contrast, the chart above also shows China’s nominal GDP growth which is not subject to an inflation adjustment (the source of the majority of the NBS’s manipulation), though it is smoothed to a lesser extent.
To put this into context, a growth rate above 6% remains a pipe-dream of many post-industrial advanced economies who are facing headwinds such as aging populations and stagnating productivity. However, Beijing’s decision to support its slowing economy by allowing more loans and local government bond issues has come at a financial cost. Last week also saw fresh estimates from the US based Institute of International Finance which placed China’s debt pile at 300% of GDP, or massive circa 15% of all global debt.
Chart 2: China’s debt pile has grown rapidly in recent years as it has pursued rigid growth targets, achieved by large volumes of infrastructure spending
Source: Bloomberg Economics
At such a critical stage in China’s rise to economic dominance, a slowing economy makes it difficult for the Chinese President to fight back against Washington use of trade tariffs and export controls as the US attempts to force Beijing to open up its economy. However, the NBS reporting strong performance of the domestic economy and less reliance on export led growth will help to bolster Beijing’s standpoint that the Chinese economy can withstand a prolonged trade war. Market participants will continue to monitor developments in the US-Sino dispute.
THE WEEK AHEAD (G7 + China)
Monday: Germany Bundesbank Monthly Report, US Chicago Fed National Activity
Tuesday: UK CBI Business Optimism, UK CBI Industrial Trends Orders, Eurozone Consumer Confidence, US API Crude Oil Stock
Wednesday: Germany Markit Manufacturing PMI, Germany Markit Services PMI, Eurozone Markit Manufacturing PMI, Eurozone Markit Services PMI, US Markit Manufacturing PMI, US Markit Services PMI, US EIA Crude Oil Stocks
Thursday: Germany Ifo Business Climate, European Central Bank Interest Rate Decision, European Central Bank Press Conference, US Durable Goods Orders, US Wholesale Inventories, US Goods Trade Balance
Friday: France Consumer Confidence, Italy Business confidence, Italy Consumer Confidence, US Q2 GDP
STAT OF THE WEEK: $350 billion – estimated contribution to global GDP from the commercial space industry (Morgan Stanley).
Data correct as at: 19/07/19